On the Table: House GOP Compromise on State-Local Tax Deduction

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By Laura Davison

Republicans in high-tax states are starting to feel the pressure to find a way, fast, to mitigate the effects of eliminating the state and local tax deduction as House leadership aims to usher a tax bill through the chamber this month.

“Last week started the really strong debate at looking for the pay-fors,” Rep. Mike Kelly (R-Pa.) told reporters Oct. 3. “Now people are just starting to hear and say, ‘oh, this affects me this way.’"

The Republican tax framework, released Sept. 27, would eliminate many deductions for individuals, including the break for state and local taxes. Eliminating the deduction, known as the SALT deduction, is one of the largest pay-fors in the GOP plan to cut tax rates, but Republicans from states with higher taxes have expressed concern it could raise taxes for their constituents. They are trying to convince House Ways and Means Chairman Kevin Brady (R-Texas) to soften the blow of cutting the tax break.

Rep. Tom Reed (R-N.Y.), who has been considering proposing to replace the deduction with a credit, said he is keeping an open mind about the plans, but is confident the bill will include some way to target tax relief at middle-income people.

“Defending the status quo is not correct for me, because I do want to get tax reform done, but at the end of the day there is a solution to this problem,” he said.

Rep. Peter King (R-N.Y.), who represents a wealthy district in New York that covers areas of Nassau and Suffolk counties, said he supports preserving the deduction. He also said that about 50 members in the House Republican Conference opposed eliminating the deduction.

“Right now, it’s the biggest issue in my district,” King told Bloomberg BNA Oct. 3. “I’m just saying that I won’t go for it. I think they need our votes to get the bill through.”

Dinner Discussion

At an Oct. 2 dinner, Brady and other Republicans discussed how to get GOP members from high-tax states to vote for a plan that would limit the deduction.

Rep. Chris Collins (R-N.Y.) said he suggested letting taxpayers choose between deducting the interest from their mortgages and deducting the property taxes they pay on their homes. Reps. Mark Walker (R-N.C.), Lee Zeldin (R-N.Y.), and Claudia Tenney (R-N.Y.) were among lawmakers present.

“Someone in a state with low property taxes might decide to deduct their mortgage interest,” Collins told reporters. “Somebody in a state like New York might deduct their property taxes.”

New Jersey (2.11 percent), New Hampshire (1.99 percent), and Illinois (1.98 percent) had the highest effective property tax rates in the country in 2016, according to data from the Tax Foundation. Hawaii had the lowest rate at 0.28 percent, followed by Alabama (0.40 percent) and Louisiana (0.50 percent), according to the data.

Other options, such as capping the amount of state and local taxes one could deduct, could also be another way to convince Republicans from high-tax states to back the tax plan, Collins said.

“I came away with a good optimistic feeling there will be an accommodation made for the SALT deduction,” Collins said. “What it finally looks like, with caps or either/or’s, I certainly believe the committee understands we need Republican votes” from high-tax states.

In addition, “we want to make sure that we’re not addressing the concerns of an individual making $5 million a year living in a $40 million dollar home or condo,” he said. “And that’s where the capping could come in,” said Collins. “You can phase things out as incomes go up, which addresses the attack that this would be a tax cut for the wealthy.”

Low-High Divide

Republicans from lower-tax states, such as Rep. Mark Meadows (R-N.C), said it isn’t fair for residents where the taxes are low to subsidize taxpayers where the taxes are high. Property taxes are 0.84 percent of the value of a home in North Carolina, according to the Tax Foundation data.

“If we’re looking at a deduction let’s make sure it’s fair and equitable for everybody or at least accessible for everybody,” Meadows said. “We can’t take a deduction from New York property taxes in North Carolina, last time I checked.”

Brady told reporters Oct. 2 that tax-writers are “focused on delivering tax relief for all Americans across the country, regardless of what state they live in. That won’t be determined until the final details of the tax reform plan are put in place. In the meantime, we are working with them, listening very closely to all our lawmakers, Republicans and Democrats alike, who are in high-tax states.”

Sen. Bob Corker (R-Tenn.), who says a tax bill mustn’t add to the deficit, said Monday he thinks the White House is showing “softness” on the state and local break, arguing that it’s “the easiest one” politically for Republicans to eliminate. High-tax states tend to lean Democratic, and GOP leaders aren’t counting on their support for a tax overhaul.

With assistance from Colleen Murphy, Kaustuv Basu (Bloomberg BNA) and Sahil Kapur (Bloomberg) in Washington.

To contact the reporter on this story: Laura Davison in Washington at lDavison@bna.com

To contact the editors responsible for this story: Meg Shreve (Bloomberg BNA) at mshreve@bna.com Alexis Leondis (Bloomberg) at aleondis@bloomberg.net

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